Surging spot prices put pressure on China mills

Iron ore spot prices have soared almost 10 per cent since the arrest of Rio Tinto executive Stern Hu, adding pressure to China's steel mills to drop their staunch opposition and join Asian peers in accepting a 33 per cent cut to Pilbara benchmark prices.

Spot prices have risen $US8 a tonne to $US89/t in the past week, in part because freight rates are increasing but also in response to China's dramatic intervention in this year's pricing talks by arresting Mr Hu and three of his Rio colleagues two weeks ago.

Delivered spot shipments are now worth more than the new $US75/t to $US80/t benchmark price agreed to between Rio and steel makers in Japan, Korea and Taiwan.

The soaring spot price is a fillip for Rio, which confirmed yesterday it was selling almost half its Pilbara production at spot prices, as opposed to benchmark values despite most of its volumes being subject to long-term offtake agreements.

In a further boost for the embattled miner, Rio also said it expected the recovery in Chinese demand for the steel-making commodity "to continue into the second half of 2009".

Rio's comments mirror those of smaller Pilbara producer Fortescue Metals Group earlier this week when the Andrew Forrest-led miner also highlighted improving market conditions in China.

Talk of a recovering iron ore demand market, which only in November had collapsed, could not come at a worse time for China's steel mills and its peak lobby group China Iron and Steel Association (CISA), which is demanding an at least 40 per cent cut to Pilbara benchmark prices.

There have been unconfirmed reports that some of China's smaller mills have accepted the 33 per cent price cut, in breach of CISA's demand.

The China-based Umetal Research Institute added more substance to the reports by saying yesterday that some of the bigger mills, which it did not name, had also struck a "provisional" 33 per cent price cut with Rio.

CISA and Rio deny that a settlement has been reached.

In the meantime, Rio is recovering from a weak March quarter performance in the Pilbara, where output was severely affected by wet weather and the aftermath of a two-week Christmas shutdown, and said yesterday it remained confident of meeting a group-wide 200 million tonne full-year production target.

The target includes a small contribution from the Iron Ore Company of Canada asset but most of the focus will be on its Pilbara unit, which produced 89.6 million tonnes in the first six months of this year. Sales totalled 91.8 million tonnes.

The stand-out performance came from Rio's Hope Downs joint venture, where half-on-half output increased 96 per cent to 8.9 million tonnes as ramp-up continued.

Analysts said Rio's Pilbara performance was in line if not slightly ahead of expectations.